Fleet Management, Purchase, and Depreciation

Company vehicles are a huge expense, so proper management is critical.

By Ed Butts, PE, CPI

Managing a water well and pump business is not simply a matter of keeping track of sales and overhead or
trying to make sure sales exceed overhead to create a profit. It also includes ongoing management and scheduling of fleet or single-vehicle purchase, depreciation, and expenses.

This task is one of the most diverse between firms and will greatly vary depending on the size, number, and type of vehicles. So, let’s examine one of the greatest expense categories for a typical water well firm: vehicle and fleet management, maintenance, and associated costs.

Fleet Management

This column has been prepared assuming some common procedures of fleet management and use exist within the water well industry. However, I caution you to consider all factors that apply to your specific business and type of operation before reaching any final decisions regarding the replacement or addition of any company vehicles.

Also please note that the diversity of type and size of drilling rigs, pump hoists, and other related equipment is so great and unique to the local region, personal preference, and specific type of operation that this class of assets has been excluded from this column.

Before beginning any meaningful discussion about replacing a fleet vehicle, it is necessary to outline some of the many advantages of developing a fleet management program. A fleet management program can be nothing more than tracking routine oil changes and tire replacement frequencies up to a detailed life-cycle analysis for each vehicle.

The need for a program of tracking repair and maintenance costs of individual company vehicles is an important factor in the operation and profitability of a business as well as the decision-making process when it becomes time to consider replacement of a specific vehicle. Simply put, some method of fleet management should be used by all businesses with a substantial fleet size.

All vehicles require routine maintenance and service at intervals that are determined by the type of use, local environmental conditions, vehicle age, fuel type, and mileage. The trick is in knowing when to cut your potential future losses resulting from excessive or catastrophic repairs by disposing of the vehicle in question before those unexpected or expensive repairs are needed.

Development of a fleet management program, with accumulated historic year-to-year costs, will provide the manager with the information needed to help decide if the subject vehicle justifies further repairs and should be kept in service. This information is often expressed as a trend in escalating costs of maintenance, usually at increasing intervals.

Certainly, the amount and type of information that should be kept is not the same for each business and should be based on the specific size and age of the fleet as well as the available record-keeping resources within the company.

The decision as to the timing of replacing or adding a fleet vehicle is often one of the most difficult financial decisions a business manager or owner can make. When applicable, several factors must be considered to make an informed and intelligent decision, including:

• Typical and seasonal weather and ground-surface conditions. This is the basis for the determination of the need for all-wheel drive vehicles.
• Leasing or buying new or used vehicles
• Available funds or source of financing with adequate cash flow to support credit purchases
• Current and projected repair costs
• Availability of critical repair parts
• Depreciation
• Fuel type and its cost and local availability
• Safety
• Current regulatory impacts
• Expected yearly mileage or hours of operation of the vehicle in question
• Type of use
• Believe it or not, possible crew morale issues.

While it is impossible to completely detail all of the considerations unique to your operation you will need to make before retiring or replacing that certain aging drill rig or pump hoist carrier, salesman’s car, or service van, it is possible to generalize some of the numerous factors often used by accountants and fleet managers when confronted with the need to modify a fleet of company vehicles.

Fleet Management Guidelines

At a minimum, I recommend that all fleets with more than five vehicles observe the following basic criteria when establishing a fleet management program:

• Vehicles should be assigned a company ID number unique to the business and one that will not easily be confused with any other operational numbers. VIN or DOT ID numbers are often used for this purpose.
• Separate files should be kept for drill rig deck engines to avoid confusion with the carrier engine.
• The files should contain all applicable make, model, and serial numbers as well as the fuel type, vehicle identification number (VIN), vehicle license, PUC or DOT number, oil/air filter numbers, oil grade, normal fluid levels, crankcase volume capacity, anti-freeze coolant type, volume, and change interval, and all special ID numbers of the vehicle, engine, transmission, and any other power train-related items.
• The files should be kept in a chronological manner or order of performed service and repair as well as increasing mileage to enable accurate trending of repair and rapid retrieval of the information.
• The files should include information regarding the frequency, grade, and condition (if available) of old oil retrievals for all oil changes. Particular care should be made to ensure that oil filters are replaced at the appropriate oil change intervals. Yearly oil analysis, particularly for large diesel or stationary engines, such as drill rig deck or PTO-driven engines, should be performed to determine trends and status of engine wear.

Stationary engines often endure more frequent and severe bearing failures, as well as head and block problems, due to the higher heat often created, but not adequately expelled, by the engine in an idle running state. This is particularly important if the cooling system is undersized or inefficient.

Proper analysis of oil can frequently indicate minor internal engine problems in advance of failure—especially related to bearings and sleeves—before they become major and expensive repairs

• A yearly audit and total cost accounting of all routine, minor, and major (filed in these separate classifications) maintenance, repairs, and overhauls should be made at the same approximate time each year to determine accurate yearly trends. These audits are also often required for DOT records.
• Special conditions of the vehicle such as commercial driver’s license (CDL) requirement, road use tax, or DOT/PUC registration can also be kept in the file but kept separate from the maintenance records.
• Any unusual increase or pattern of tire wear or replacement, front end alignment frequency, brake repair, or other common repair items should be promptly examined.
• The file format should be set up in a manner that any other company individual could easily understand and maintain the file as well as retrieve the information if the primary employee responsible for the files is not available.
• Vehicle leases, sales, titles, and ownership documents should not be kept in the maintenance files.
• Safety-related issues or repairs such as brake repairs, excessive tire wear, and steering box problems should be given special and immediate attention and individual mention in the file.
• Hydraulic sub-systems should also be monitored and tracked for oil and filter change intervals and repairs. Specific information regarding service or replacement of the hydraulic pump, filters, valves, hoses, and a hydraulic system schematic should be recorded and separately filed.

While setting up a fleet management program is not especially difficult, it does require adequate knowledge of the specific types of equipment used within the company and a basic understanding of automotive terms to properly classify and track repairs.

There are many excellent commercially available software programs and firms available to assist your business with establishing a fleet management program. I encourage you to investigate all your options with a full understanding as to the complexity of the selected program or firm before purchasing any program or service. As previously indicated, depending on the fleet’s size and diversity, an effective and current fleet management system is an important tool for a manager when considering the options of vehicle replacement or continuing repair of an existing vehicle and should be considered for all water well businesses.

Special Vehicle Type Considerations

Many of the vehicles in our business such as drill rig carriers or pump hoist trucks are specialized pieces of equipment with specific duties and customized assemblies. These vehicles are primarily used to transport the machine they carry to a jobsite or back to the shop where they may sit without running for up to several months at a time.

Typically, most drill rigs are equipped with separate deck engines to operate the drill rig’s compressor, hydraulic system, and occasionally mud pump, although most pump hoists and some smaller rotary drill rigs operate by power take-off (PTO) arrangements where the power to operate the machine is derived
from the truck engine itself.

In these cases, the engine is often exposed to a more severe operation than a typical truck engine. Hours upon hours of idling with rapid cycles of acceleration and deceleration, especially in a stationary environment, often exposes the engine to increased wear and heat resulting in more frequent overhauls
than rigs with separate engines used for transport and drill rig operation. In situations such as these, the fleet manager must evaluate the expected hours of operation and the type of loading the engine will be incurring.

General Guidelines for Vehicle Purchasing

Now that you have established an effective fleet management system, you will eventually be faced with the decision to replace or lease or purchase a new or used fleet vehicle.

Generally, obtaining a vehicle for the water well business is typically performed through a direct or timed (credit) purchase of new or used equipment or a lease. There are many used vehicles that can fit into a fleet and provide years of service. The advantage with a new vehicle, though, is the ability to search out and verify the engine operational requirements and capabilities before ordering the vehicle.

In all cases, it is vital the proposed vehicle be matched to the extent possible for the on- and off-road and other conditions it will face, particularly for the harder and more frequent idling and rapid engine-speed changes incurred with drilling rigs and pump hoists. This often necessitates an enhanced or supplementary lubrication system that will effectively maintain engine lubrication at all engine speeds.

Purchasing a new vehicle is often the preferred route as the buyer can usually specify in advance the type and size of vehicle they desire, along with the gross and net weight rating; wheelbase; rear tire number and weight distribution; engine type and size; transmission type, ratio, and number of gears; fuel type and capacity; performance options (turbocharging, aftercooling, supplementary cooling or lubrication systems,
cylinder shutdown, boosting, etc.); and other options and operating factors. This must be balanced, though, with the higher cost and delay on assembly and factory delivery now experienced for many custom-built vehicles.

However, purchasing a used vehicle for this same application is a definite risk and should be performed only after completing an evaluation. The scope and detail of the evaluation must be dependent on the vehicle type, beginning at the vehicle’s exterior surfaces and continuing through the engine, clutch, and transmission (drivetrain) assembly.

The vehicle inspection should also include a cursory examination of the vehicle for a corroded, twisted, or bent frame; signs of a past collision or impact; missing components such as a bumper, frame patches or welds, defective camber, unexplained body dents or patched repairs; excessive or unbalanced tire wear; maintenance; DMV, DOT, or PUC records; and mileage.

The engine should be checked for a compression reduction from the manufacturer’s standard or differences between cylinders, oil cleanliness, color, and condition (presence of dirt or grit, etc.); cooling system condition and capacity; belts and hoses; frayed wiring, battery; engine or transmission leaks; and the condition of the transmission/clutch through the differential.

Since the engine may now be exposed to operational conditions that were not previously present, the engine may rapidly experience premature failure or an unexpected and expensive repair. In addition, the fleet buyer should verify the engine has sufficient output horsepower to adequately operate the parasitic
loads (i.e., the hydraulic pump, mud pump, compressor, or other related systems).

Depending on anecdotal or manufacturer’s data for an engine more than one or two years old is not sufficient and failure to verify the available flywheel horsepower may result in an underpowered machine. Where a power take-off (PTO) assembly is anticipated to be used, the buyer must also verify that adequate access to the flywheel is available or the transmission when an automatic transmission is present.

The PTO must be able to mount and fit to the bell housing and flywheel with adequate clearance and without undue force or alignment problems. The flywheel must also be fully intact, without missing teeth, and not warped.

Since the engine under PTO conditions will often operate at a stationary position for many hours, the engine’s cooling and lubrication systems become important elements to prolonging engine life. The entire cooling system, including the water pump, radiator, heat exchanger (when applicable), hoses, belts, and reserve storage, must be evaluated and tested for adequate capacity and to ensure that the engine operating temperature will always remain within tolerable and safe limits.

In some cases, modifications of the cooling system by enlarging the water pump, fan, or radiator or adding supplementary cooling will help to dissipate the additional heat generated from stationary operation.

The lubricating system includes the oil pump and engine mounting, filter, oil pan, and engine internal porting. Because the engine will often operate in extended idle conditions, it is imperative that the lubricating system can distribute oil throughout all the engine’s internal components (i.e., pistons,
rings, sleeves, bearings, rocker arms, valves, etc.) and ports at all engine speeds.

Depending on constant engine acceleration to maintain adequate oil pressure is dangerous, wastes fuel, and may ultimately lead to engine failure. The buyer should examine both the operating temperature and oil pressure of the proposed used engine at various speeds from idle to maximum to verify all expected engine operational conditions are within acceptable limits before purchasing a used vehicle that will be used for PTO operation.

To Buy New or Used: That Is the Question

Additional considerations that should be addressed when purchasing a new or used fleet vehicle include the following.

The buyer must verify the gross vehicle weight (GVW) is adequate to carry all anticipated loads. Quite often, drill rod, tools, bits, or extra equipment carried on a drill rig are not added to the weight of the machine itself, only to find out later the vehicle is overloaded when carrying these additional loads. Additionally, remember that single or combined loads of 26,000 pounds or more require a driver with a CDL.

The wheelbase of the truck is also an important factor, especially when a drill rig or pump hoist will be mounted to it. The wheelbase (distance between the center of the front and rear axles) and the overall length are two factors used to determine the tilting moment of the assembled rig.

The tilting moment is commonly referred to as the amount of force or strain required to overturn or tilt the vehicle. Several factors are used to determine this factor including front end weight, rear end weight, wheelbase length, mast layback, picking load, outrigger location and support, and distribution of weight throughout the vehicle.

Generally, the longer the wheelbase, the greater the tilting moment (or required load to tilt the truck). This is due to the leverage gained by the weight of the engine and front end combined with the distance from the front to the rear where the load is usually applied. This factor is obviously a critical component in the selection of any vehicle to be used as a drill rig carrier or a pump hoist and must be totally factored when
considering purchase of a new or used truck.

Tires are often a high expense. Thus, the buyer should examine all tires for tread depth, sidewall wear, cupping, tread loss (especially on retreads), and proper and equal inflation.

Finally, when possible, the buyer should examine all available service records and have an independent mechanic check the engine and drivetrain along with the structural status of the frame and body itself.

Vehicles routinely exposed to salt air or water, or even frequent road salt, will usually exhibit signs of corrosion to the undercarriage, body, and frame. This is a hazardous condition and one that can result in structural collapse, or at the least, an expensive repair.

While the factors used to evaluate purchasing a used versus new service or sales vehicle are not as dramatic as those used for a larger vehicle like a rig, many still apply. Factors such as structural condition of the frame and engine wear should be considered for all used vehicles.

Although an obvious difference exists in cost, money is still money and a fleet buyer must evaluate the available purchasing funds as well as cash flow when considering purchasing or financing a new or used vehicle.

Service vehicles, similar to the larger trucks used for carrying drill rigs and pump hoists, tend to be specialized and equipped for the type of work they perform, so leasing is not as good an option. However, many excellent buys can be found through regional truck buyers guides. I have found many good late-model vehicles already set up for service work through these sources.

Vehicle Leasing

Given the current economic conditions, leasing or purchase of a lease return vehicle often represents an attractive option for many businesses, particularly for sales vehicles. Although the selection of a specific type and size of vehicle may be limited, particularly for supporting heavier equipment, leasing a vehicle is another option often employed for fleet vehicle acquisition.

A fleet lease is a contractual agreement between the business (lessee) and the leasing company or owner of the vehicle (lessor), where the business is allowed to use one or more vehicles in exchange for a monthly fee. Unlike purchasing vehicles, the lessee doesn’t own the vehicles but rather rents them for a set time period, typically, at least one to two years.

Depending on the vehicle supplier and the lease contract, the business may have the option to lease the same exact vehicles or a mix of different types of vehicles. This flexibility can be advantageous for businesses with varying operational requirements that may rely on different equipment. Once the lease contract has expired, the lessee generally has the option to:

• Renew the contract and upgrade to a new vehicle.
• Purchase the leased vehicle.
• Surrender the vehicle and find a new vehicle supplier.

Leases can be an open-end lease or closed-end lease. Generally, an open-end lease will terminate after a year, then the business has the option to continue it on a month-to-month basis. At the conclusion of the lease, the business will need to pay the difference between the residual value of the vehicle and the actual market value at that point.

A closed-end lease, sometimes referred to as a walk-away lease, ensures that once the contract has ended, the business won’t have any further obligations, assuming the vehicle was properly maintained and didn’t exceed mileage limits. This type of lease is ideal for businesses that have long-term fleet leasing needs of at least three years. If the business already owns a fleet, some leasing companies may be willing to purchase
those vehicles and then lease them back to the business. This fleet leasing option makes it possible to free up cash flow that may otherwise be tied up in company vehicles.

Don’t Be a ‘Fuel’

My only purpose in mentioning fuel types is to inform you that the government currently has many excellent rebate and tax credit programs available for using alternative fuels. These fuel options include ethanol and electric vehicles, and, although somewhat presently limited for the water well industry, these alternatives are continuing to grow in availability and are often a viable option for sales and service vehicles.

I highly recommend that when considering purchasing a new fleet vehicle, particularly for sales use, you consider a vehicle that uses (or can use) alternative fuels. The Department of Energy, through its alternative fuels website, offers several links and discussions regarding the application of alternative fuels to fleet vehicles as well as the tax credits available through the use of these fuels.

Vehicle IRS Deduction and Depreciation Factors

If an individual uses a vehicle only for business purposes, the business may deduct its entire cost of ownership and operation, subject to IRS limits. However, if the vehicle is used for both business and personal purposes, the business may deduct only the cost of its business use.

The amount of the deductible car expense can generally be determined by using one of two methods: the IRS standard mileage rate method or the actual expense method. If both methods qualify, the business may opt to figure the deduction both ways before choosing a method to see which yields a larger deduction. Consult an accountant for specifics.

Every vehicle in a fleet will lose value at a certain pace for the duration of ownership, known as depreciation, with the rate of devaluation determined by a variety of parameters such as vehicle type, age, mileage, and cost of acquisition.

The majority of vehicles lose 15% to 35% of their original value in the first year and up to 50% or more during the next three years. As a result, businesses must understand how to minimize depreciation while maintaining fleet efficiency.

Fleet depreciation is the most expensive expenditure for a typical fleet. Depreciation is unavoidable but there are techniques to understand it better. Using excellent business strategies will not make it disappear but will help a firm deal with it.

The key to mitigating the effects of depreciation is to reduce capital costs while increasing the resale value of a fleet vehicle. The fundamental goal is to replace vehicles at the most cost-effective moment for the business, which is when the lifespan cost of the vehicle is at its lowest.

Any business owner or fleet manager who can accomplish this goal will have reduced the impact of devaluation and be confident they have received the most from each vehicle. Once again, an accountant should be consulted to determine the applicable depreciation schedule and rate.

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While I have tried to outline some of the many factors used in the acquisition and maintenance of fleet vehicles, it is impossible to cover all of them in the space allowed. I hope that I have given you some “fuel for thought” when it comes time to get that next vehicle.

We’ll kick off a two-part miniseries on recruiting and retaining employees next month.

Until next month, work safe and smart.

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Ed Butts, PE, CPI, is the chief engineer at 4B Engineering & Consulting, Salem, Oregon. He has more than 40 years of experience in the water well business, specializing in engineering and business management. He was honored by the National Ground Water Association with the 2025 Technology Award. He can be reached at epbpe@juno.com.